Evergrande is one of China’s biggest real estate developers and one of the world’s largest companies by revenue. It employs 200,000 people, is said to sustain more than 3.8 million jobs each year and owns more than 1,300 projects in 280 cities across China.

 

But it is struggling under a mountain of debt and has missed some of its repayment obligations, driving fears that the company could default, sending shockwaves through global financial markets.

 

At Marche Wealth Management, we are all about simplicity. Our strategy is to only provide investment solutions that we fundamentally understand, in alignment with the principles of Warren Buffet and Berkshire Hathaway. And here is the thing about Evergrande: because it is so complicated, it is not easily understood. Their core business is real estate development, but they are also invested, for example, in electric vehicles, sports and theme parks (including the water park in the photo above), a food and beverage business, a soccer team, a soccer school (cost: $185-million), and a soccer stadium (cost: $1.7-billion).

 

Evergrande borrowed heavily to finance these projects and now has more than $300-billion in liabilities. Analysts at Goldman Sachs regard the company’s structure as so confusing, they can’t be sure exactly what path the company can take back to health (specifically, they find it “difficult to ascertain a more precise picture of [its] recovery.”). Evergrande’s credit ratings have been downgraded and Fitch, the credit rating agency, views “a default of some kind as probable.”

 

So Evergrande does not fit our equity strategy and is also at odds with our fixed income philosophy, with the emphasis we place on preservation of capital, emphasis on risk relative to return and strict management of credit quality.

 

Goldman Sachs adds that the Chinese bond market could be hit by the crisis, and that a loss of confidence could spill over into global financial markets. Suffice to say that Evergrande is so complicated, we are not invested in either its stock or its bonds, and we do not expect any likelihood of that in the foreseeable future.

 

However, if Evergrande’s troubles create volatility in the market, we are well-positioned, as always, to take advantage. This is because we do not own the market (but instead a carefully-chosen portfolio of stocks customized specifically to your financial plan), and so we have the flexibility to take advantage of mispriced assets.

 

Speaking of debt, I argued in the August edition of Marche Monthly that the candidates in the federal election did not pay enough attention to debt and deficit reduction. Indeed, the new Liberal minority government plans to continue increasing our federal debt.

 

It should be noted that the government plans to increase the debt slightly more slowly than our estimated GDP growth, thereby lowering the ratio of debt to GDP. But, as the Globe and Mail puts it, “that plan is about to crash into the reality of minority government, as both the NDP and Bloc Québécois push for enormously expensive measures that would send the deficit skyrocketing, and set the federal debt burden on an upward march.”

 

Translation: taxes will go up. We have been saying this for quite some time now, and it definitely bears repeating: it is more important than ever to make sure you have the proper planning and strategies in place, to maximize your wealth after tax.

 

To do this, we look for ways to leverage the use of life insurance, prescribed rate loans, trusts, income splitting and other strategies; in fact, these are things we are continually doing. In addition, as part of our year-end process, over the next quarter we will be reviewing potential strategies including tax-loss harvesting and ensuring registered plan contributions have been maximized.

 

Due to our outperformance of the market, some capital gains have been triggered in taxable accounts. We have already done some tax-loss selling (selling investments that had accrued losses, in order to offset capital gains realized elsewhere in your portfolio), although only limited opportunities remain available to us at this time.

 

With interest rates at historic lows, it is also a good time to review your credit strategy. A few examples that could be worth considering include changing your mortgage or line of credit agreement, lending money to a trust, or lending to a spouse who is taxed at a lower rate. It is notable that the CRA rate for prescribed loans is currently at 1%, which is the lowest rate possible and the rate that will be used for the entire period of the loan.

 

Tax planning is a fundamental part of will and estate planning, and given the likelihood of tax increases in the near future, it should be no surprise that we received tremendous interest in an event we held September 29th. Entitled “Estate Planning: More Than Just a Will,” this special Webex presentation was delivered by Leanne Kaufmann, President & CEO of RBC Royal Trust. Leanne discussed the importance of estate planning, and answered some of the big questions about protecting your family and your legacy.

 

At Marche Wealth Management, we listen to your hopes and dreams, whatever they may be, and prepare a full financial plan for you that includes a custom-fit array of services and solutions for the long term. Especially given that so much of our wealth planning work is multigenerational, no element of that financial plan is more important than your will.

 

If you were not able to attend, we still have you covered: we will be sending out a summary of Leanne’s presentation, and, if any of your objectives have changed since the last time you reviewed your will and estate plan, we encourage you now to get in touch with our office to organize a discussion with our Will and Estate Consultant, Alleen Sakarian.

 

At the moment, parts of the market are being driven by speculation on companies that are weak on the fundamentals and thus do not meet our selection criteria. While it is true that right now, some speculators are making some money on industries including electric cars and bitcoin for example, and that this makes it temporarily difficult to outperform the market as we usually do, we remain confident that our Buffett-like focus on deeply understanding our purchases will prevail, just as it always has in the long term.

 

I like this quote from Benjamin Graham, considered by many to be the father of value investing; he was also Warren Buffett’s professor at Columbia Business School (Buffett even named his first son after Graham):

 

“Speculators often prosper through ignorance; it is a cliché that in a roaring bull market knowledge is superfluous and experience is a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss.”

 

The seasons may change, but some things never do – such as our commitment that you will feel so well-listened to and understood that we will earn the business of every next generation.

 

 

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Tyler Marche, MBA, CFP, FCSI

Your life, uncomplicated

 

tyler.marche@rbc.com

1-416-974-4810

www.tylermarche.com